Objective Ways Of Determining Trending Vs Ranging

How often have you heard "the trend is your friend"? Or "always trade with the trend"? Common wisdom has it that knowing the direction of the trend is very important. Moreover, not all indicators work in all trading conditions. Some work very well in trending markets, others work well in ranging markets. The ones that work well in trending markets normally die painful deaths in ranging markets, and vice versa.

So you've got 3 kinds of markets - up, down, sideways. Up and down = trending, sideways = ranging. More volatility = trending, less volatility = ranging. These market conditions are often easy to spot in hindsight with the naked eye. But for automated trading you need objective, measurable, and repeatable rules which work in real-time.

This post hopes to list such indicators. If you know of others or other ways to use them, you are free to edit this wiki entry and add them to the list for the benefit of your fellow traders. Or send us an email and we'll add it for you.

Just as no indicator can give 100% correct trading signals, so to do these indicators sometimes give false readings. You should experiment and backtest to find the best one for you.
 

Directional Movement Index

+DI, -DI, and ADX are part of the Directional Movement Index group of indicators.

ADX measures the strength of a trend. A larger value means the market is trending; a lower value means ranging. Where is the cut-over point? This depends on the symbol and time-frame you are trading with, so backtest to find the value that works for you. 25 seems like a good starting point. I have also read that below 20 means ranging, above 30 means trending, and values between 20 and 30 are either or none.

+DI and -DI determine the direction. From Investopedia:

When the +DI is above the -DI, prices are moving up, and ADX measures the strength of the uptrend. When the -DI is above the +DI, prices are moving down, and ADX measures the strength of the downtrend.
 

One Moving Average

If a moving average of decent length (say 20+) is rising, you can say there is an uptrend. If falling then there's a downtrend.

Using one moving average is better than nothing, but if using one is good, surely using two is better.
 

Two Moving Averages

Use a combination of faster and slower moving averages, say SMA(10) and SMA(50). If the faster average is above the slower, that's an uptrend. If the faster is below the slower, that's a downtrend.

The distance between the 2 averages gives an indication of the strength of the trend. The MACD indicator measures this, so a rising MACD means a stronger trend.
 

Three Moving Averages

If two moving average is better, maybe using 3 will be fantastic. For example, moving averages of period 5, 10, and 20:

1. When SMA(20) is above SMA(10) is above SMA(5) - that's a downtrend.
2. When SMA(20) is below SMA(10) is below SMA(5) - that's an uptrend.
3. When they are not in that nice order, the market is ranging.
    

Two Bollinger Bands

Use a combination of a faster and slower Bollinger Bands. While the faster Bollinger Bands are contained within the slower, it's a ranging market. Otherwise it's trending.

Normally in this trend it's just one of the faster Bollinger lines outside the slower. If the faster upper Bollinger line is above the slower, that's an uptrend. If the faster lower Bollinger line is below the slower, that's a downtrend. If it's both, then that price is about to move big time! (Or the price has already done it's big jump and now it's too late. Cest la vie).
 

Bollinger Bandwidth

A Bollinger Band's two outer lines flare outwards when prices are volatile, and narrow when they aren't. The Bollinger Bandwidth indicator actually measures that distance, so a rising Bandwidth means higher volatility, and that means a higher possibility that the market is trending. Or you could say any Bandwidth value over X is fine. Or perhaps when the Bandwidth indicator is above its moving average.
 

High-Low Range

The High-Low range gives a value indicating how long a candle is. You can use the average or maximum high-low range - if rising then the bars are getting progressively longer. Longer bars means more volatility.
 

True Range

The High-Low range checks just 1 bar, whereas the True Range checks a bar and the bar next to it. Again, the average or maximum true range can be used as a measure of volatility.
 

Ichimoku Kinko Hyo

We added this indicator for a customer but don't really know how to use it yet. Apparently it's good for this kind of thing. Here is Investopedia's explanation. And here is another random link Google gave us.